Rutger Nooij: Dinner is Being Served

Market analysts have been talking about greens shoots for many months now. And although optimism may be good in general, it should be based on something. Some proof. Transactions evidencing the confidence of market parties, for instance. We have not seen too many of those yet. Back in April, Mark Preston, Grovenor Group’s CEO put it like this:

People talking about green shoots of recovery have been spending too much time looking at the bulbs in their garden.

With transactions lacking for many months now, real estate markets have been looking for new price equilibriums. For direct real estate investments (bricks & mortar) this turned out to become a search for new bottoms. Such new price lows appeared both in terms of yield shift and in terms of rental value. The latter effect, I believe, is still ongoing or may be starting in some markets now. Once rental levels have stabilised with confidence, the investment climate becomes healthy again. Investment yields took a hike of 100 basis points -and much more- from their previous levels and I believe they have stabilised by now.

Stability is key for recovery. The market needs some stability in order to gain confidence. And confidence is needed for transactions to pick up. Nothing’s new so far. But quite a few recent news items back my belief that dinner is being served right now. Anyone with some appetite is invited to pick a table that is stable enough to carry loads of flavourous courses. Markets are anticipating on their recovery and that the first movers have finished their starter dishes already and are looking for a tasty main course.

Confident that European property markets are recovering, investors are pouring money into Germany’s open-ended real-estate funds, which are flush with cash and on the prowl for acquisitions.

JLL: Prime office yields steady in major markets, confirming the stability of yields at their current, attractive levels:
The relative stabilisation of prime yields has reflected an improvement in investor sentiment. London and Paris have seen high levels of investor interest for the best assets in prime locations and with secure income in terms of lease length and covenant strength.

However, please do bear in mind that rental levels may still suffer, due to continuing weak occupier demand:

Take-up levels continue to be down on historic averages, headline rents are under continued downward pressure and incentives are increasing. Investors’ focus on long leases and strong covenants means that competitive bidding for these assets may not fully recognise the extent of weakness in the occupier base.

Capital values stabilising in UK market
After two years of dramatic decline, capital values are now stabilising for UK property, according to the UK Quarterly Snapshot from Aberdeen Property Investors. Investor demand is returning, aided by sterling’s fall over the past year. The high income return now available from UK property relative to other asset classes also looks very attractive, despite continuing falls in rental values.

The same article confirms that rental values are now also stabilising around their current levels:

In the occupier market, the pace of rental decline has begun to show signs of stabilising. Rents are currently falling by an annualised 9% and 6% respectively in the retail and industrial sectors. The office sector is experiencing a sharper pace of decline, at an annualised 15%, although this is down from the 20% seen last quarter.
CBRE confirms that rents are falling across European property markets, but yields stabilizing in some markets.

The downturn in real estate values across Europe has so far been predominantly driven by increases in yields. However, we have now clearly entered a period in which rents are the driving force behind the property value corrections.

So, although CBRE is still cautious in predicting real recovery, they confirm the growing investor interest for picking up properties at current price levels:

It is too early to signal the end of the period of rising yields, but equally the scale and incidence of yield increases are now a lot more patchy than they have been for a while. While investment turnover remains relatively low, there appears to be growing interest in several areas of the market, supported by the repricing that has already taken place.

In the coming months or at the start of 2010 we are going to look at buying opportunities. [...] The extra proceeds from the bond issue would give the company a chance to act quickly when buying opportunities arose.

So, this dinner may be about opportunities (“All you can eat, for just over 8%!”). In that case, it doesn’t tell you so much about the underlying (economic) drivers that will affect the value of the assets one way or another. The question whether economic recovery is underway, is still hard to answer. However, I do believe that low interest rates, combined with surging stock prices (e.g.: S&P 500 is up 50% from their March 2009 low) are fueling consumers’ and investors’ confidence alike. As long as some stability comes to the markets and remains, these are interesting times to grab a bite.